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Mutual Funds

• 1980, 5 million Americans owned mutual funds.

• Today over 100 million Americans in 55 million households owned mutual funds.

• In November 2013, mutual fund assets totaled $10.8 trillion.

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What is a mutual fund?

• Mutual funds combine or pool the resources (money) of a large group of investors.

• Buy and sell decisions are made by fund manager(s), who is paid for the service provided.

• Investors purchase shares of the fund to invest in it

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Investment Companies and Fund Types

• An Open-end fund is an investment company that stands ready to buy and sell shares in itself to investors, at any time.

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Investment Companies and Fund Types

• Net asset value (NAV) is the value of the assets held by a mutual fund, divided by the number of shares. In other words it’s the price per share.

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Mutual Fund OperationsOrganization and Creation

• Most mutual funds are created by investment advisory firms (like Vanguard or Fidelity Investments), or brokerage firms with investment advisory operations (Waddell and Reed).

• Investment advisory firms earn fees for managing mutual funds.

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Mutual Fund Costs and FeesTypes of Expenses and Fees

• Sales charges or “loads” – loads are charged on purchases 4%-7%. These

are basically commissions paid to the broker or advisor who sold you the funds

– If you pick your own funds “No Load” funds are better.

• Management fees: – Usually range from 0.25% to 1.00% of the funds

total assets each year.

– Lower is better.

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Example: Fee Table

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Mutual Fund Costs and FeesWhy Pay Loads and Fees?

•You may want professional advice. Many advisors earn their living by selling load funds and making a commission.

•Or, you may want a specialized type of fund.– Perhaps one that specialized in Italian

companies– Loads and fees for specialized funds tend to be

higher, because there is little competition among them.

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Stock Funds, I.

• Some stock funds emphasize capital appreciation (growth)– Capital appreciation– Growth

• Some emphasize income payouts (dividends)– Growth and Income– Equity income

• Some stock funds focus on companies in a particular size range.– Small company– Mid-cap

• Some stock fund invest internationally.– Global– International– Region– Country– Emerging markets

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Stock Funds, II.

• Sector funds specialize in specific sectors of the economy, such as:– Biotechnology

– Internet

– Energy

• Other fund types include:– Index funds-don’t pick winners and losers, simply buys the

index. These funds have much lower expenses• S & P 500• Wilshire 2000• Nasdaq 400

– Social conscience, or “green,” funds

– Tax-managed funds

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Bond Funds

Bonds invest in debt:governmentcorporate

safety versus return

You can still lose money on bond fund investments!

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Stock and Bond Funds

• Funds that do not invest exclusively in either stocks or bonds are often called “blended” or “hybrid” funds.

• Examples include:– Balanced funds– Asset allocation funds– Target Retirement Year funds (e.g. 2030, 2050)

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Mutual Fund Objectives: Recent Developments, I.

• A mutual fund “style” box is a way of visually representing a fund’s investment focus by placing the fund into one of nine boxes:

GrowthBlendValue

Large

Medium

Small

Siz

e

Style

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Mutual Fund Performance

• Mutual fund performance is very closely tracked by a number of organizations.

• Financial publications of all types provide mutual fund data.

• www.morningstar.com has a “Fund Selector” that provides performance information

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Mutual Fund Performance

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Mutual Fund Performance

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Mutual Fund Performance

• While looking at historical returns, the level of risk of the various fund categories should also be considered.

e.g. Gold, Latin American, Russia

• Whether historical performance is useful in predicting future performance is a subject of ongoing debate.

• No strong correlation between fees and performance

• Exchange Traded Funds (ETFs) are funds that are traded on the stock exchange rather than purchased through a broker or directly from the fund company.